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Basel ii Accord
Sections 92 to 108 |
C. Implementation
considerations
1. The
mapping
process
92. Supervisors
will be responsible for assigning eligible
ECAIs’ assessments to the
risk
weights available
under the standardised risk weighting framework,
i.e. deciding which
assessment
categories correspond to which risk weights.
The mapping
process should be objective and should result in
a risk weight assignment consistent with that of
the level of credit risk reflected in the tables
above. It should cover the full spectrum of risk
weights.
93. When
conducting such a mapping process, factors that
supervisors should assess
include, among
others, the size and scope of the pool of
issuers that each ECAI covers,
the
range and meaning
of the assessments that it assigns, and the
definition of default used
by
the ECAI. In order
to promote a more consistent mapping of
assessments into the
available
risk weights and
help supervisors in conducting such a process,
Annex 2 provides guidance
as to how such a
mapping process may be
conducted.
94. Banks must use
the chosen ECAIs and their ratings consistently
for each type of
claim, for both
risk weighting and risk management purposes.
Banks will not be allowed
to
“cherry-pick” the
assessments provided by different
ECAIs.
95. Banks must
disclose ECAIs that they use for the risk
weighting of their assets
by
type of claims,
the risk weights associated with the particular
rating grades as determined
by
supervisors
through the mapping process as well as the
aggregated risk-weighted assets
for
each risk weight
based on the assessments of each eligible
ECAI.
2.
Multiple
assessments
96. If there is
only one assessment by an ECAI chosen by a bank
for a particular claim,
that assessment
should be used to determine the risk weight of
the claim.
97. If there are
two assessments by ECAIs chosen by a bank which
map into different
risk weights, the
higher risk weight will be
applied.
98. If there are
three or more assessments with different risk
weights, the assessments
corresponding to
the two lowest risk weights should be referred
to and the higher of those
two risk weights
will be applied.
3.
Issuer versus issues
assessment
99. Where a bank
invests in a particular issue that has an
issue-specific assessment,
the risk weight of
the claim will be based on this assessment.
Where the bank’s claim is
not
an investment in a
specific assessed issue, the following general
principles apply.
*In circumstances
where the borrower has a specific assessment for
an issued debt
— but the bank’s
claim is not an investment in this particular
debt — a high quality
credit assessment
(one which maps into a risk weight lower than
that which applies
to an unrated
claim) on that specific debt may only be applied
to the bank’s
unassessed claim if
this claim ranks pari passu or senior
to the claim with an
assessment in all
respects. If not, the credit assessment cannot
be used and the unassessed claim will receive
the risk weight for unrated
claims.
* In circumstances
where the borrower has an issuer assessment,
this assessment
typically applies
to senior unsecured claims on that issuer.
Consequently, only
senior claims on
that issuer will benefit from a high quality
issuer assessment. Other
unassessed claims
of a highly assessed issuer will be treated as
unrated. If either
the issuer or a
single issue has a low quality assessment
(mapping into a risk weight
equal to or higher
than that which applies to unrated claims), an
unassessed claim
on the same
counterparty will be assigned the same risk
weight as is applicable to
the low quality
assessment.
100. Whether the
bank intends to rely on an issuer- or an
issue-specific assessment,
the
assessment must
take into account and reflect the entire amount
of credit risk exposure the
bank has with
regard to all payments owed to
it.(34)
(34) For example, if a bank is
owed both principal and interest, the assessment
must fully take into account and reflect the
credit risk associated with repayment of both
principal and
interest.
101. In order to
avoid any double counting of credit enhancement
factors, no supervisory
recognition of
credit risk mitigation techniques will be taken
into account if the credit
enhancement is
already reflected in the issue specific rating
(see paragraph 114).
4.
Domestic currency and foreign currency
assessments
102. Where unrated
exposures are risk weighted based on the rating
of an equivalent
exposure to that
borrower, the general rule is that foreign
currency ratings would be used
for
exposures in
foreign currency. Domestic currency ratings, if
separate, would only be used
to
risk weight claims
denominated in the domestic
currency.(35)
(35) However, when an exposure
arises through a bank’s participation in a loan
that has been extended, or has been guaranteed
against convertibility and transfer risk, by
certain MDBs, its convertibility and transfer
risk can be considered by national supervisory
authorities to be effectively mitigated.
To qualify, MDBs must have
preferred creditor status recognised in the
market and be included in footnote 24. In such
cases, for risk weighting purposes, the
borrower’s domestic currency rating may be used
instead of its foreign currency rating.
In the case of a guarantee against
convertibility and transfer risk, the local
currency rating can be used only for the portion
that has been guaranteed. The portion of the
loan not benefiting from such a guarantee will
be risk-weighted based on the foreign currency
rating.
5.
Short-term/long-term
assessments
103. For
risk-weighting purposes, short-term assessments
are deemed to be
issuespecific.
They can only be
used to derive risk weights for claims arising
from the rated facility.
They cannot be
generalised to other short-term claims, except
under the conditions of
paragraph
105.
In no event can a
short-term rating be used to support a risk
weight for an unrated long-term claim.
Short-term assessments may only be used for
short-term claims against banks and corporates.
The table below provides a framework for banks’
exposures to specific short-term facilities,
such as a particular issuance of commercial
paper:
(36) The notations follow the
methodology used by Standard & Poor’s and by
Moody’s Investors Service. The A-1 rating of
Standard & Poor’s includes both A-1+ and
A-1-.
(37) This category includes all
non-prime and B or C
ratings.
104.
If a short-term rated facility attracts a 50%
risk-weight, unrated short-term
claims
cannot
attract a risk weight lower than 100%.
If
an issuer has a short-term facility with an
assessment that warrants a risk weight of 150%,
all unrated claims, whether long-term or
short-term, should also receive a 150% risk
weight, unless the bank uses recognised credit
risk mitigation techniques for such
claims.
105.
In cases where national supervisors have decided
to apply option 2 under the
standardised
approach to short term interbank claims to banks
in their jurisdiction, the interaction with
specific short-term assessments is expected to
be the following:
•
The
general preferential treatment for short-term
claims, as defined under
paragraphs
62 and 64, applies to all claims on banks of up
to three months original
maturity
when there is no specific short-term claim
assessment.
•
When
there is a short-term assessment and such an
assessment maps into a risk
weight
that is more favourable (i.e. lower) or
identical to that derived from
the
general
preferential treatment, the short-term
assessment should be used for
the
specific
claim only. Other short-term claims would
benefit from the general
preferential
treatment.
•
When
a specific short-term assessment for a short
term claim on a bank maps into
a
less
favourable (higher) risk weight, the general
short-term preferential treatment
for
interbank
claims cannot be used. All unrated short-term
claims should receive the
same
risk weighting as that implied by the specific
short-term assessment.
106.
When a short-term assessment is to be used, the
institution making the
assessment
needs
to meet all of the eligibility criteria for
recognising ECAIs as presented in paragraph 91
in terms of its short-term
assessment.
6. Level
of application of the
assessment
107.
External assessments for one entity within a
corporate group cannot be used to
risk
weight
other entities within the same
group.
7.
Unsolicited ratings
108.
As a general rule, banks should use solicited
ratings from eligible ECAIs.
National
supervisory
authorities may, however, allow banks to use
unsolicited ratings in the same
way
as
solicited ratings.
However,
there may be the potential for ECAIs to use
unsolicited ratings to put pressure on entities
to obtain solicited ratings. Such behaviour,
when identified, should cause supervisors to
consider whether to continue recognising such
ECAIs as eligible for capital adequacy
purposes.
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